Thoughts and ramblings on science, economics and society - in search of The Answer.

Friday, 6 January 2017

Stock Market Index: The Barometer of Business Elitism

As more and more people have investments linked to stocks and shares, so more people become obsessed with those ticker-tape numbers that roll by on the business news: FTSE this, DOW Jones that, yada yada. Only recently did it dawn on me how toxic these numbers could be. Just like GDP, which I've written about before, there is an almost unanimous view that bigger is better - up is good and down is bad. This is such a woeful simplification as to be dangerous. Touted as a proxy for the health of the business economy, these number (stock indices and GDP) have the potential to drive policy, with unintended consequences. Give the goal of raising GDP to an AI and it might suggest measures to increase crime, car crashes and climate destruction - all great for the economy by that simplistic measure.

In the case of stock market prices, it's not just the bundling of the bad with the good that is the problem, but also the promotion of elitism and inequality. Why? Because the most commonly quoted indicies focus on such a staggeringly narrow slice of the business pie. In the case of the UK it's the FTSE 100 - yes, just 100 companies! Laughable? Well, save your breath. The US Dow Jones Industrial Average includes only 30 companies! Yup, the state of the entire US business economy is based on the value of just the 30 largest companies. And indeed, a change in value of these few companies has a knock on effect to sentiment around the world. So, anything that can be done to bolster the value of the likes of ExxonMobil, McDonalds, Coca-Cola, Wal-Mart is ... good. But ... umm ... what?

Let's look at what this means with some examples, using the generally held belief that Up is Good:

If Sainsbury's (or Starbucks) opens up a new store (increasing its value) and a bunch of smaller businesses in the area struggle or fold because of it, this is: GOOD.

If a large listed company, say, Sports Direct (or Home Depot), swallows up all of its smaller rivals, that is: GOOD.

If British American Tobacco run a successful ad campaign to children in developing countries, this is: GOOD. (I know, this is the counting-the-bad problem, rather than the elitist problem, but I couldn't resist).

If a bunch of agile, innovative tech start-ups win some business off one of the Big Boys, this is: BAD.

So basically, the FTSE or Dow Jones going up really only tells us that the Top Dogs are doing well. I'm sure that will make us feel better. And widening the net, to the FTSE 250 or All Share index in the UK, doesn't really help, because the majority of businesses are not listed on any market.

The conclusion is the same as for GDP. We need to stop fixating on numbers that don't represent what we think they do and start putting more effort into measuring (and paying greater heed to) what's really important: happiness and well-being.